FINAL EXAM REVIEW MANAGERIAL ACCT

Nanu Corporation manufactures two products; data are shown below: PRODUCT X: CM RATIO = 40%, relative sales = 40% PRODUCT Y: CM RATIO = 30%, relative sales = 60% If Nanu's monthly fixed costs average $425,000, what is its break-even point expressed in sales dollars?

average CM = (40% * 40%) + (30% * 60%) = 34% 425000/34% = 1250000

A budget prepared using the total quality management approach is always achievable by departments within a company.

false

Differential costs are those that are the same among alternatives.

false

Flexible budgets can be prepared for sales budgets but not for productions budgets.

false

In a master budget, the sales forecast would be dependent upon the budgeted production figures.

false

In making a decision, management will look thoroughly at both relevant and irrelevant data.

false

Opportunity costs are recorded in the accounting records.

false

The behavioral approach to budgeting has as its goal the complete elimination of inefficiency.

False

In the short run, the greatest increase in profitability will result from increasing sales in those profit centers with the:

Highest contribution margin ratios.

A responsibility income statement generally does not show the:

Net income of each responsibility center.

Alton Company produces metal belts. During the current month, the company incurred the following product costs: Raw materials $100,000;Direct labor $75,000;Electricity used in the Factory $25,000;Factory foreperson salary $3,750; andMaintenance of factory machinery $2,000. Alton Company's total product costs:

$100,000 + $75,000 + $25,000 + $3,750 + $2,000 = $205,750

The break-even point in a cost-volume-profit graph is always found:

total revenue = total FC + VC

The dollar amount used by one division which supplies a good or a service to another division within a company is called a:

transfer price

A budget provides a comprehensive plan enabling multiple departments to work together in a coordinated manner.

true

All incremental revenue or incremental costs are relevant.

true

In preparing a master budget, budgeted levels for production, manufacturing costs, and operating expenses normally are determined after preparing the sales forecast.

true

A 45% contribution margin ratio means that:

45% of company's revenue is available to cover FC and contribute towards operating income

As the volume of output decrease:

FC per unit increase

If a budget is to provide a basis for evaluating departmental performance, departmental managers should not know what their budget targets are until after the budget period has ended.

False

The responsibility margin is calculated by:

Subtracting fixed costs traceable to a center from its contribution margin.

The bookstore of a university would be considered:

profit center

The following information was developed from the financial statements of Donelson, Inc. At the beginning of 2018, the company's former supplier went bankrupt, and the company began buying merchandise from another supplier. gross profit on sales 2018 1.008m 2017 1.134m income before tax 2018 230.4k 2017 252k net income 2018 172.8k 2017 189k net income % of sales 2018 6% 2017 7.5% Compute the cost of goods sold in dollars and as a percentage of net sales for each year.

COGS 2018 2880000-1008000 = 1872000 COGS 2017 2520000-1134000 = 1386000 % 2018 1872000/2880000 = 65% % 2017 1386000/1134000 = 55%

The Fine Point Company currently produces all of the components for its one product, an electric pencil sharpener. The unit cost of manufacturing the motor for this pencil sharpener is: DM 1.75 DL 1.65 VOH 0.75 FOH 0.60 The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit. The relevant cost of manufacturing the motor to be considered in reaching the decision is:

$1.75 + $1.65 +$0.75 =$4.15

Determine the amount of manufacturing overhead given the following information: yep factory 2600 telephone exp office 950 telephone exp sale 1050 factory foreman salary 5200 maintenance factory 1000 maintenance sales 880

$2,600 + $950 + $5,200 + $1,000 = $9,750

Burns Industries currently manufactures and sells 20,000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs. Burns decides to accept the special order for 5,000 units from Allen at a unit sales price that will add $100,000 per month to its operating income. The unit price Burns charging Allen is:

$200,000 + $100,000 = $300,000÷5,000 = $60

Armstrong, Inc. uses a flexible budget. Armstrong produced 16,000 units in May incurring direct materials cost of $20,480. Its master budget for the year projected direct materials cost of $362,500, at a production volume of 290,000 units. A flexible budget for May should reflect direct materials cost of:

$362,500 ÷ 290,000 = $1.25; $1.25 × 16,000 = $20,000

Baskin Promotions, Inc. sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 71,000 T-shirts: sales 1236110 COGS 721360 Gross profit 514750 operating expense (100000 FC) 382580 operating income 132170 income taxes (30% operating income) 39651 net income 92519 Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 51,000 T-shirts. What unit cost did Baskin use in budgeting the cost of goods sold for the year?

$721,360 ÷ 71,000 = $10.16 per unit

If the unit sales price is $20, variable costs are $12 per unit and fixed costs are $25,000 what is the contribution margin ratio per unit?

($20 − $12) ÷ $20 = 40%

The following information was developed from the financial statements of Donelson, Inc. At the beginning of 2018, the company's former supplier went bankrupt, and the company began buying merchandise from another supplier. gross profit on sales 2018 1.008m 2017 1.134m income before tax 2018 230.4k 2017 252k net income 2018 172.8k 2017 189k net income % of sales 2018 6% 2017 7.5% net sales each year

2018: 173800/6% = 2880000 2017: 189000/7.5% = 2520000

If monthly fixed costs are $21,000 and the contribution margin ratio is 42%, the monthly sales volume required to break even is:

21000/0.42 = 50000

The following information was developed from the financial statements of Donelson, Inc. At the beginning of 2018, the company's former supplier went bankrupt, and the company began buying merchandise from another supplier. gross profit on sales 2018 1.008m 2017 1.134m income before tax 2018 230.4k 2017 252k net income 2018 172.8k 2017 189k net income % of sales 2018 6% 2017 7.5% Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes expense is not an operating expense.)

Operating expenses in dollars: 2018: ($1,008,000 gross profit - $230,400 income before tax) = $777,600 2017: ($1,134,000 gross profit - $252,000 income before tax) = $882,000 Operating expenses as a percentage of net sales: 2018: ($777,600 ÷ $2,880,000) = 27% 2017: ($882,000 ÷ $2,520,000) = 35%

Cost centers are evaluated primarily on the basis of their ability to control costs and:

The quantity and quality of the services they provide.

Creative Star Corporation produces three lines of desks from wood: Classic, Royal, and Standard. Cost and revenue data pertaining to each product are shown below: Classing Sell price 175, TVC 75 royal sell price 245, TVC 165 Standard sell price 95, TVC 65 Classic desks require five square yards of wood, Royal requires ten square yards, and Standard requires three square yards. High demand for each product line far exceeds the company's production capacity. If Creative Star Corporation has an unlimited supply of wood available, which products should it produce?

classic only

Sunk costs have already been incurred and cannot be changed by future actions.

true

Shown below are selected data from the financial statements of Supreme Co. Dollar amounts are in millions (except for the per share data). Income statement: net slaes 1050 COGS 475 operating exp 395 net income 300 Balance Sheet: avg total equity 1500 avg total assets 3100 Supreme reported earnings per share for the year of $5 and paid cash dividends of $2 per share. At year-end, the Wall Street Journal listed Supreme's capital stock as trading at $79 per share. What was Supreme's operating income (in millions)?

$1,050 − $475 − $395 = $180

Canfield Construction applies overhead to its projects at a rate of $65 per direct labor hour. Laborers are paid an average rate of $30 per hour. The Jefferson Apartments project was charged a total of $1,200,000 in direct materials and $450,000 in direct labor costs. Overhead applied to the Jefferson Apartments project amounted to:

$450,000 ÷ 30 = 15,000 hours × $65 = $975,000

Dalton Co. follows a policy of allocating all common costs equally among its profit centers. A partial responsibility income statement for a typical month is shown below: dalton co responsibility margin: 200k, FC 165k, income from ops 35K PC1 RM 80K, FC 55k, income from ops 25k PC2 RM 70k, FC 55K, income from ops 15K PC3 RM 50K, FC 55k, income from ops -5k After evaluating these data, Dalton Co. decides to close Profit Center 3. This action eliminates all revenue, variable costs, and fixed costs traceable to Center 3, but eliminates only $35,000 in common fixed costs. Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2. After the closing of Profit Center 3, the monthly income from operations for Profit Center 1, as measured by Dalton Co. should be approximately:

$80,000 - $55,000 − $10,000 = $15,000

Alton Company produces metal belts. During the current month, the company incurred the following product costs: Raw materials $85,000; Direct labor $52,500; Electricity used in the Factory $22,500; Factory foreperson salary $3,250; and Maintenance of factory machinery $2,050. Alton Company's direct product costs totaled:

$85,000 + $52,500 = $137,500

Perry's Cycle Company manufactures annually 20,000 units of TushSeat, a bicycle seat used on many of the company's products, and also sold directly to retailers for $38 per unit. At the current level of production, the cost per unit to produce TushSeat consists of: DM 9 DL 7 VOH 6 FOH 3 It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers. Assume that Perry's fixed costs remain unchanged if the seats are purchased from an outside supplier. In order to operate more profitably by buying the seats rather than manufacturing them, Perry must negotiate a price per unit from the outside supplier that is less than

$9+ $7 +$ 6 = $22

Starbright manufactures children car seats, strollers, and baby swings. Starbright's manufacturing costs are budgeted as follows: Factory utilities $105,000Factory foremen salaries $75,000Machinery setup costs $30,000Total manufacturing overhead $210,000 The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: OH Factory utilities allocation DLH estimated activity level 14258 OH foreman salaries allocation Machine h activity level 21000 OH sep up allocation # production runs activity level 83 During the current month, the following levels of activities were incurred: car seats DLC 55425, DLH 4619, machine H 7500, PR 25, units 1500 strollers DLC 84423, DLH 7035, MH 10250, PR 40, units 2500 swings DLC 31259, DLH 2604, MH 3250, PR 18, units 750 total DLC 171106, DLH 14258, MH 21000, PR 83, units 4750 What are the total manufacturing overhead costs allocated to the Strollers for the current month?

($105,000 factory utilities cost ÷ 14,258 total direct labor hours × 7,035 hours allocated to Strollers) + (75,000 foremen salaries ÷ 21,000 machine hours × 10,250 machine hours allocated to Strollers) + ($30,000 setup costs ÷ 83 setups × 40 production runs allocated to Strollers) = $102,873 (rounded)

Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What will be the monthly margin of safety (in dollars) if 1,800 units are sold each month?

(1800*85) - 82500 = 70500

If the unit sales price is $36, variable costs are $14 per unit and fixed costs are $26,000, how many units must be sold to earn an income of $360,000?

(25k+360k)/22K = 17545

Product X sells for $35 per unit and has related variable costs of $25 per unit. The fixed costs of producing product X are $65,000 per month. How many units of product X must be sold each month to earn a monthly operating income of $85,000?

(65000+85000)/10 = 15000

The Parry Company's breakeven point in units is 20,000. Assuming that variable costs are 30% and fixed costs are $100,000, what is the company's projected operating income if sales are $750,000?

(750000*(100%-30%))-100000=425k

Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. How many units must be sold each month to earn a monthly operating income of $8,000?

(8000+165000)/17 = 1442

Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What is the contribution margin ratio of Mitchell 's product?

(85-68)/85*100 = 20%

A company with monthly revenue of $120,000, variable costs of $50,000, and fixed costs of $40,000 has a contribution margin of:

120-50=70

If a product sells for $8, variable costs are $6 and fixed costs are $150,000, what would total sales have to be in order to break-even?

150000/(8-6) = 75000*8=600k

Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What is the monthly sales volume in dollars necessary to break-even?

16500/20% = 82500

A company with monthly fixed costs of $170,000 expects to earn monthly operating income of $25,000 by selling 6,500 units per month. What is the company's expected unit contribution margin?

170+25= 6.5x x=30

Lone Star, Inc., reported sales of $560,000, cost of sales of $255,000, and operating expenses of $130,000 for the current year. Calculate the amount of net income and net income as a percentage of sales.

560-255=305-130=175 175/560 = 31.25%

Division X supplies partially completed units of product to division Y. The divisions negotiated a price of $30 per unit. Assuming Division X completed and transferred 3,000 units to division Y, the total transfer price on this transaction is:

3,000 units × $30 = $90,000

Patterson's Department Store prepares monthly income statements by sales departments. These income statements are organized to show contribution margin, performance margin, and responsibility margin for each sales department, as well as operating income for the store as a whole. The cost of heating and air conditioning the store should be:

Classified as a common fixed cost.

Chic Jewelers views each branch location as an investment center. The local branch reported the following results for the current year: sales 5.5m variable expenses 3.254m traceable fc 320k average total assets 2.4m The contribution margin of the local branch is:

Contribution margin = $5,500,000 − $3,254,000 = $2,246,000

Steel Fabricating, Inc. manufactures furniture at its plants in Akron, Greensboro, and Schenectady. The company prepares monthly income statements segmented by plant. These income statements are organized to disclose contribution margin, performance margin, and responsibility margin for each plant, in addition to operating income for the company as a whole. The Akron factory employs two quality control inspectors at an annual salary of $70,000 each. These salaries should be classified as:

Controllable fixed cost.

Baskin Promotions, Inc. sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 71,000 T-shirts: sales 1236110 COGS 721360 Gross profit 514750 operating expense (100000 FC) 382580 operating income 132170 income taxes (30% operating income) 39651 net income 92519 Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 51,000 T-shirts. Assume Baskin actually achieves the 51,000 unit sales level, and that net income actually earned at this level was $49,300. A performance report would indicate that net income was:

[($514,750 ÷ 71,000) × 51,000] − $302,980 = $66,770; $66,770 − (0.3 × $66,770) = $46,739;$49,300 − $46,739 = $2,561

Perry's Cycle Company manufactures annually 20,000 units of TushSeat, a bicycle seat used on many of the company's products, and also sold directly to retailers for $38 per unit. At the current level of production, the cost per unit to produce TushSeat consists of: DM 9 DL 7 VOH 6 FOH 3 It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers. Assume that seats can be purchased from the outside supplier at $25 each, and that 60% of total fixed costs incurred in producing TushSeat will be eliminated by this strategy. Buying the seats instead of manufacturing them would cause Perry's operating income to:

[Make ($38 - $22 - $3 = $13.00) - Buy ($38 - $25 - ($3 ×0.4) = $11.80))] × 20,000 = $24,000 Decrease

Operating income can be calculated by:

margin of safety * CM ratio

The following information was developed from the financial statements of Donelson, Inc. At the beginning of 2018, the company's former supplier went bankrupt, and the company began buying merchandise from another supplier. gross profit on sales 2018 1.008m 2017 1.134m income before tax 2018 230.4k 2017 252k net income 2018 172.8k 2017 189k net income % of sales 2018 6% 2017 7.5% Prepare a condensed comparative income statement for 2017 and 2018. Include the following items: net sales, cost of goods sold, gross profit, operating expenses, income before income tax, income taxes expense, and net income. Omit earnings per share statistics.

net sales 2880000 2520000 less COGS 1872000 1386000 gross profit 1008000 1134000 less operating exp 777600 882000 income before tax 230400 252000 less income tax 57600 63000 net income 172800 189000

sales yr 2 500000 yr 1 400000 COGS tr 2 220k yr1 268k gross profit yr 2 170k yr 1 132k operating expenses yr 2 125k yr 1 116 net income yr2 45 yr 1 16k b. State whether the changes from year 1 to year 2 are favorable or unfavorable.

sales - favorable gross profit - favorable

sales yr 2 500000 yr 1 400000 COGS tr 2 220k yr1 268k gross profit yr 2 170k yr 1 132k operating expenses yr 2 125k yr 1 116 net income yr2 45 yr 1 16k Prepare common size income statements for Price Company, a sole proprietorship, for the two years shown as above by converting the dollar amounts into percentages. For each year, sales will appear as 100 percent and other items will be expressed as a percentage of sales. (Income taxes are not involved as the business is not incorporated.)

sales yr 2 100% yr 1 100% COGS yr 2 66% yr 1 67% Gross profit yr 2 34% yr 1 33% operating exp yr 2 25% yr 1 29%

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, the repaired units can be sold for $425,000. The company receives an offer to purchase these motors for $325,000 before repairing them. The company's decision should be to sell the motors at the offered price.

true

The term "out-of-pocket cost" is often used to describe costs which have not yet been incurred and which may vary among alternative courses of action.

true